Balkan Democracies Fray as Anti-Austerity Boosts Radicals

By Agnes Lovasz -
Jul 27, 2012

Austerity is starting to tug at the
seams of Europe’s youngest democracies.

Romanian Prime Minister Victor Ponta’s drive to oust the
president, whose budget cuts drew praise from German Chancellor
Angela Merkel, will come to a head in a July 29 referendum.
Incoming Serbian Premier Ivica Dacic threatened to sack the
central bank chief and declared foreign banks an “enemy.” The
leu and the dinar fell to record lows against the euro as debt
costs soared.

Politicians in the region are riding anti-austerity
sentiment that has also bolstered radicals in more established
European democracies such as Greece, France and the Netherlands.
The post-communist leaders are following Hungarian Prime
Minister Viktor Orban, who has battled the EU for two years as
he sought to consolidate his power, said Lars Christensen, chief
analyst at Danske Bank A/S. (DANSKE)

“The politics and the rhetoric of the Hungarian government
and what we now see in southeastern Europe -- it’s the same
sentiment,” Christensen said. Many Balkan countries “are
moving in the wrong direction at the same moment as Hungary.
They have all kinds of attempts to rig the process. Democratic
institutions are not really respected.”

Investor Worries

The Romanian leu and the Serbian dinar have been the
world’s second and third worst-performing currencies against the
euro in the past month after the Sudanese pound. The leu has
dropped 3.5 percent, touching a record-low 4.6509 per euro on
July 24. It traded at 4.6075 at 4:06 p.m. in Bucharest. The
dinar declined 2.4 percent in the past month to a record-low
119.6020 against the euro yesterday and was at 117.9933 at 3:07
p.m. in Belgrade.

Yields on Serbia’s benchmark 10-year foreign bond maturing
in 2021 have risen 60 basis points in the past three months to
7.09 percent today. The yield on Romania’s 2022 Eurobonds have
risen 19 basis points to 6.18 percent over the same period.

Romania and Serbia, which are among countries in eastern
Europe where political risk pushes up borrowing costs and
weakens currencies, also have “steep external financial
challenges,” Mai Doan and Raffaella Tenconi, London-based
economists at Bank of America Merrill Lynch, said July 20 in a
research note.

“The volatile risk environment, together with financing
pressures and political uncertainty in these countries, will
most likely lead to further pressures” on government bonds in
the months ahead, Doan said by e-mail yesterday.

Deteriorating Democracies

The quality of democracy has deteriorated in several
countries in central and southeastern Europe, with “massive
infringements on participation rights and rule of law,”
Bertelsmann Stiftung, Germany’s largest private non-profit
foundation, said in a May presentation of its Transformation
Index on its website.

Serbia and Hungary rank second and third from the bottom in
eastern Europe, according to the index, which gauges the quality
of democracy, a market economy and political management in 128
developing and transition countries. Ukraine has the region’s
worst score and Romania is fifth last, according to this year’s
figures published in March.

Government moves in Hungary and Romania “suggest to me
that this is still a generation that doesn’t have democratic
instincts in their blood,” Tomas Valasek, director of foreign
policy and defense at the Centre for European Reform in London,
said July 18 by phone. “It takes more for the generational
change to cycle some of the old politicians out of the system.”

Southeastern Europe’s politicians are riding a wave of a
Europe-wide backlash against austerity that started in the west.

The crisis in the euro region and the damage it may wreak
on Europe’s political landscape “hasn’t been sufficiently
emphasized,” Nobel laureate Paul Krugman said in a July 25 New
York Times blog post.

‘Fail Disastrously’

If the policies of austerity pursued by major parties
across the political divide “fail disastrously, which is
getting close to a certainty, the effect is to discredit the
entire political center, leaving radicals right and left as the
only people who aren’t tainted,” he wrote in the post.

A clash in Romania between Ponta’s ruling coalition and
Basescu triggered a series of legal changes and decisions in
Parliament leading to a suspension of the president for one
month so that people can cast their ballot on whether he can
retain his job.

Efforts to ease impeachment rules and diminish the powers
of the Constitutional Court drew criticism from European Union
leaders including European Commission President Jose Barroso and
Merkel, who voiced concern that democracy is backsliding in the
former communist country.

‘Narrow Observation’

“I’m still very much worried about the state of democracy
in Romania,” EU Justice Commissioner Viviane Reding told
reporters July 25 in Brussels. “The situation will be under
very narrow observation.”

Basescu stands a chance to win reinstatement if less than
the required 9.1 million voters, or half the electorate, turn
out, voiding the referendum. The opposition has urged a boycott
of the vote. If the threshold is met, about 72 percent of voters
would impeach Basescu, according to a July 23-25 survey by
polling company Operations Research for private television
Realitatea TV. The poll of 1,150 people had a margin of error of
2.9 percentage points.

“As Ponta focuses on power struggle, it is economic policy
that is suffering,” Otilia Simkova, an analyst at Eurasia Group
in London, said by phone.

Dacic was sworn in today after three months of political
wrangling while the dinar hit a record low and borrowing costs
rose in a country where one in four is out of work.

Milosevic’s Party

His Socialists are back in power for the first time since
the ousting of the party’s founder, Slobodan Milosevic, who is
blamed for fomenting the 1990s Balkan civil wars that destroyed
the economy.

A former wartime spokesman for Milosevic, Dacic has derided
foreign banks and is attempting to force out central bank
Governor Dejan Soskic, blaming him for the rise in bad debt at
several banks in which the state has a stake.

The currency’s weakness and an expanding bad-loan portfolio
could require at least seven banks to boost capital to meet
requirements, the central bank said on July 16 in its Financial
Stability Report. Soskic vowed July 16 not to resign.

The Cabinet pledged to resume talks with the International
Monetary Fund and the World Bank and faster integration with the
European Union. The IMF suspended a $1.3 billion precautionary-
loan program in February amid evidence the previous
administration was slipping on budget and debt targets.

“People in a difficult personal situation are looking for
a savior, a strong leader, anyone who tells them with confidence
that he is going to end austerity, tax the banks, the rich,
everybody with suspiciously high profits and put money into
voter’s pockets,” said Eurasia’s Simkova. “The problem is
that, looking for a strong leader, voters are likely to get an
autocrat.”